SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            -------------------------

                                    FORM 10-Q

(MARK ONE)

  [X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2000

                                       OR

  [ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE TRANSITION PERIOD FROM ______ TO ________

                         COMMISSION FILE NUMBER: 1-11961

                            -------------------------

                             CARRIAGE SERVICES, INC.
             (Exact name of registrant as specified in its charter)

                   DELAWARE                                 76-0423828
        (State or other jurisdiction of                   (I.R.S. Employer
         Identification No.)
 incorporation or organization)                 1300 POST OAK BLVD., SUITE 1500,Identification No.)

  1900 ST. JAMES PLACE, 4TH FLOOR, HOUSTON, TX                 77056
    (Address of principal executive offices)(Zip                (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 556-7400(713) 332-8400

                            ------------------------

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[No [ ]

   The number of shares of the Registrant's Class A Common Stock, $.01 par value
per share, and Class B Common Stock, $.01 par value per share, outstanding as of
July 31,November 8, 2000 was 14,176,77414,229,601 and 1,905,6621,903,212 respectively.

                             CARRIAGE SERVICES, INC.

                                      INDEX


                                                                        PAGE

PART I - FINANCIAL INFORMATION

   ITEM 1 - FINANCIAL STATEMENTS

      Consolidated Balance Sheets as of
         December 31, 1999 and JuneSeptember 30, 2000                         3

      Consolidated Statements of Operations for the
         Three Months ended JuneEnded September 30, 1999 and 2000 and the
         SixNine Months ended JuneEnded September 30, 1999 and 2000                    4

      Consolidated Statements of Cash Flows for the
         SixNine Months ended JuneEnded September 30, 1999 and 2000                    5

      Notes to Consolidated Financial Statements                          6

   ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS                911

   ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK      1417

PART II - OTHER INFORMATION


   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          15

   ITEM 5.  OTHER INFORMATION                                            1518

   ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                             1719

Signature                                                                1820

                                       2

                             CARRIAGE SERVICES, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31, JUNESEPTEMBER 30, 1999 2000 ------------ --------------------------- --------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ........................................................................................... $ 2,517 $ 5,6596,426 Accounts receivable .................................... -- Trade, net of allowance for doubtful accounts of $6,058 in 1999 and $5,200$6,283 in 2000 ...................................................................... 23,036 21,39019,256 Other ............................................................................................................................... 4,941 5,866 ------------ ------------5,053 --------------- --------------- 27,977 27,25624,309 Assets held for sale, net ............................................................ -- 5,504 Inventories and other current assets .................................................................... 13,851 14,713 ------------ ------------14,320 --------------- --------------- Total current assets ............................................................................... 44,345 47,62850,559 Property, plant and equipment, at cost, net of accumulated depreciation of $17,250 in 1999 and $20,953$20,861 in 2000 .................................................................................................. 153,347 155,380148,436 Cemetery property, at cost ................................................................................................. 65,920 65,26463,809 Names and reputations, net of accumulated amortization of $14,339 in 1999 and $17,324$17,967 in 2000 ................................................................................... 231,393 229,223222,699 Deferred charges and other noncurrent assets ............................................................. 44,585 47,976 ------------ ------------45,463 --------------- --------------- $ 539,590 $ 545,471 ============ ============530,966 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .............................................................................................................. $ 4,726 $ 5,1935,101 Accrued liabilities ........................................................................................................ 11,938 11,96414,315 Current portion of long-term debt and obligations under capital leases ................................................................................................... 5,496 3,612 ------------ ------------2,559 --------------- --------------- Total current liabilities ....................................................................... 22,160 20,76921,975 Preneed liabilities, net ....................................................................................................... 9,099 7,0866,461 Long-term debt, net of current portion ........................................................................... 178,942 179,990182,323 Obligations under capital leases, net of current portion ....................................... 3,333 3,2343,222 Deferred income taxes ............................................................................................................. 23,021 28,974 ------------ ------------24,762 --------------- --------------- Total liabilities ....................................................................................... 236,555 240,053 ------------ ------------238,743 --------------- --------------- Commitments and contingencies Redeemable preferred stock ................................................................................................... 1,172 1,172 Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust holding solely Carriage Services, Inc. 7% convertible junior subordinated debentures ............................................................................ 89,854 89,85789,884 Stockholders' equity: Class A Common Stock, $.01 par value; 40,000,000 shares authorized; 13,912,000 and 14,178,00014,179,000 issued and outstanding at December 31, 1999 and JuneSeptember 30, 2000, respectively ............................................. 139 142 Class B Common Stock, $.01 par value; 10,000,000 shares authorized; 2,030,000 and 1,906,000 issued and outstanding at December 31, 1999 and JuneSeptember 30, 2000, respectively ..................................................................... 20 19 Contributed capital ........................................................................................................ 195,931 195,277193,127 Retained earnings ............................................................................................................ 15,919 18,951 ------------ ------------7,879 --------------- --------------- Total stockholders' equity ..................................................................... 212,009 214,389 ------------ ------------201,167 --------------- --------------- $ 539,590 $ 545,471 ============ ============530,966 =============== ===============
The accompanying notes are an integral part of these financial statements. 3 CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, ENDED JUNESEPTEMBER 30, ------------------------ --------------------------------------------------- ---------------------------- 1999 2000 1999 2000 ---------- ---------- ---------- ---------------------- ------------ ------------ ------------ Revenues, net Funeral ............................................................................................... $ 30,81629,083 $ 29,68629,665 $ 64,32893,411 $ 65,26894,932 Cemetery ..................................... 11,655 11,446 20,013 24,237 ---------- ---------- ---------- ---------- 42,471 41,132 84,341 89,505........................................................ 11,387 10,359 31,400 34,596 ------------ ------------ ------------ ------------ 40,470 40,024 124,811 129,528 Costs and expenses Funeral ...................................... 22,212 24,348 44,170 50,523......................................................... 21,991 24,871 66,161 75,392 Cemetery ..................................... 8,549 8,714 14,878 17,781 ---------- ---------- ---------- ---------- 30,761 33,062 59,048 68,304 ---------- ---------- ---------- ----------........................................................ 8,440 8,527 23,319 26,308 ------------ ------------ ------------ ------------ 30,431 33,398 89,480 101,700 ------------ ------------ ------------ ------------ Gross profit ................................. 11,710 8,070 25,293 21,201.................................................... 10,039 6,626 35,331 27,828 General and administrative expenses .............. 2,275 2,381 4,712 4,869 ---------- ---------- ---------- ----------................................. 2,202 4,237 6,915 9,106 Impairment/losses on assets held for sale or sold ................... -- 12,449 -- 12,449 ------------ ------------ ------------ ------------ Operating income ............................. 9,435 5,689 20,581 16,332(loss) ......................................... 7,837 (10,060) 28,416 6,273 Interest expense, net ............................ 3,494 3,433 6,960 7,152............................................... 3,145 3,562 10,105 10,716 Financing costscost of company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust .............. 510................................ 1,641 510 3,282 ---------- ---------- ---------- ----------1,641 2,151 4,922 ------------ ------------ ------------ ------------ Total interest and financing costs ........... 4,004 5,074 7,470 10,434............................ 4,786 5,203 12,256 15,638 Income (loss) before income taxes and extraordinary item ......................... 5,431 615 13,111 5,898......................................... 3,051 (15,263) 16,160 (9,365) Provision (benefit) for income taxes ....................... 2,335 449 5,637 2,826 ---------- ---------- ---------- ----------................................ 1,312 (4,212) 6,949 (1,386) ------------ ------------ ------------ ------------ Income (loss) before extraordinary item ............. 3,096 166 7,474 3,072......................... 1,739 (11,051) 9,211 (7,979) Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit of $151 ................. (200)................................. -- -- (200) -- ---------- ---------- ---------- ---------------------- ------------ ------------ ------------ Net income ....................................... 2,896 166 7,274 3,072(loss) ................................................... 1,739 (11,051) 9,011 (7,979) Preferred stock dividend requirements ............ 28............................... 25 20 56 40 ---------- ---------- ---------- ----------78 61 ------------ ------------ ------------ ------------ Net income (loss) available to common stockholders ................ $ 2,8681,714 $ 146(11,071) $ 7,2188,933 $ 3,032 ========== ========== ========== ==========(8,040) ============ ============ ============ ============ Basic earnings per share: Net income (loss) before extraordinary item .............................. $ 0.190.11 $ 0.01(0.69) $ 0.470.58 $ 0.19(0.50) Extraordinary item ......................................................................... $ (0.01)-- $ -- $ (0.01) $ -- ---------- ---------- ---------- ---------------------- ------------ ------------ ------------ Net income ...................................(loss) ............................................... $ 0.180.11 $ 0.01(0.69) $ 0.460.57 $ 0.19 ========== ========== ========== ==========(0.50) ============ ============ ============ ============ Diluted earnings per share: Net income (loss) before extraordinary item .............................. $ 0.190.11 $ 0.01(0.69) $ 0.450.57 $ 0.19(0.50) Extraordinary item ......................................................................... $ (0.01)-- $ -- $ (0.01) $ -- ---------- ---------- ---------- ---------------------- ------------ ------------ ------------ Net income ...................................(loss) ............................................... $ 0.180.11 $ 0.01(0.69) $ 0.440.56 $ 0.19 ========== ========== ========== ==========(0.50) ============ ============ ============ ============ Weighted average number of common and common equivalent shares outstanding: Basic ........................................ 15,877 16,027 15,843 16,002 ========== ========== ========== ==========........................................................... 15,906 16,084 15,864 16,030 ============ ============ ============ ============ Diluted ...................................... 16,335 16,125 16,981 16,624 ========== ========== ========== ==========......................................................... 15,983 16,084 16,049 16,030 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 4 CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, --------------------------------------------- 1999 2000 -------- ------------------ ---------- Cash flows from operating activities: Net income ..........................................................(loss) ................................................................................. $ 7,2749,011 $ 3,072(7,979) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................................... 7,789 9,470Amortization .................................................................. 12,044 14,161 Loss on early extinguishment of debt, net of income taxes ............................................... 200 -- Loss on sale of business assets ................................................................ -- 1,349 Impairment on assets held for sale ............................................................. -- 11,100 Provision for losses on accounts receivable ....................... 2,821 1,958.................................................... 3,294 4,004 Deferred income taxes ............................................. 424 5,887 -------- --------.......................................................................... 2,161 1,675 ---------- ---------- Net cash provided by operating activities before changes in assets and liabilities .......................... 18,508 20,387......................................................... 26,710 24,310 Changes in assets and liabilities, net of effects from acquisitions: (Increase) in accounts receivables ................................ (6,818) (3,913)............................................................. (7,003) (5,496) (Increase) in inventories and other current assets ................ (2,358) (297) Decrease............................................. (1,486) (160) (Increase) decrease in deferred charges and other ............................ 291 285.............................................. (1,185) 323 Increase (decrease) in accounts payable ........................... (1,022) 467........................................................ (703) 375 Increase (decrease) in accrued liabilities ........................ 1,984 (255)................................................................ 3,474 1,303 (Decrease) in preneed liabilities ................................. (412) (1,506) -------- --------.............................................................. (3,190) (2,160) ---------- ---------- Net cash provided by operating activities ............... 10,173 15,168............................................. 16,617 18,495 Cash flows from investing activities: Prearranged funeral costs ........................................... (3,316) (2,081)......................................................................... (5,695) (2,830) Purchase of note receivable ................................................................................................................ -- (566) Acquisitions, net of cash acquired ................................... (31,908) (1,333)................................................................. (37,551) (1,516) Proceeds from sale of business assets .............................................................. -- 2,199 Capital expenditures ................................................. (9,351) (6,357) -------- --------............................................................................... (13,405) (9,472) ---------- ---------- Net cash used in investing activities ................... (44,575) (10,337)................................................. (56,651) (12,185) Cash flows from financing activities: Proceeds from long-term debt ......................................... 21,970 26,298....................................................................... 133,357 34,943 Payments on long-term debt and obligations under capital leases ...... (77,411) (27,233).................................... (180,866) (34,415) Payment of acquisition-related obligation ...................................................................................... -- (1,147)(3,297) Proceeds from issuance of common stock ............................... 656 499............................................................. 659 500 Proceeds from issuance of company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust ...................................................... 90,30089,881 -- Payment of preferred stock dividends ................................. (56) (40) Other, net ........................................................... -- (66) -------- --------............................................................... (78) (61) Payment of deferred debt charges and other ......................................................... (1,934) (71) ---------- ---------- Net cash provided (used) by (used in) financing activities ..... 35,459 (1,689)...................................... 41,019 (2,401) Net increase in cash and cash equivalents .............................. 1,057 3,142............................................................ 985 3,909 Cash and cash equivalents at beginning of period ............................................................................ 2,892 2,517 -------- ------------------ ---------- Cash and cash equivalents at end of period ........................................................................................ $ 3,9493,877 $ 5,659 ======== ========6,426 ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest ...............................................and financing costs ......................................................... $ 9,04211,578 $ 10,795 ======== ========17,680 ========== ========== Cash paid for income taxes .................................................................................................................... $ 7,1327,499 $ 344 ======== ========530 ========== ========== Non-cash consideration for acquisitions .......................................................................................... $ 1,6481,914 $ -- ======== ================== ==========
The accompanying notes are an integral part of these financial statements. 5 CARRIAGE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION (a) The Company Carriage Services, Inc., (the("Carriage" or the "Company") is the fourth largest publicly-traded provider of products and services in the death care industry in the United States. As of JuneSeptember 30, 2000, the Company owned and/orand operated 182176 funeral homes and 42 cemeteries in 31 states. (b) Principles of Consolidation The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. (c) Interim Disclosures The information for the three and sixnine months ended JuneSeptember 30, 1999 and 2000 is unaudited, but in the opinion of management, reflects all adjustments which are of a normal, recurring nature necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying consolidated financial statements have been prepared consistent with the accounting policies described in the Company's report on Form 10-K for the year ended December 31, 1999, and should be read in conjunction therewith. Certain prior period amounts in the consolidated financial statements have been reclassified to conform with current period presentation. (d) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (e) Accounting Changes In December 1999, the Securities and Exchange Commission (the "Commission") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which, as amended, is to be implemented by the beginning offor the fourth quarter of 2000, and applied retroactively to the first three quarters of this fiscal year, to provide guidance related to recognizing revenue in circumstances in which no specific authoritative literature exists. Members of the death care industry, including us,in consultation with the Commission, have agreed to certain changes in the manner in which cemetery preneed sales and costs are reviewingrecorded. The changes that are meaningful to the Company are a change from recording cemetery merchandise and service revenue, and their related costs at the time the contract is executed, to the period in which they are delivered. The industry participants are continuing to review the application of the Staff Accounting Bulletin with the Commission which may have a material affect onas it relates to the manner in which we record preneed revenuestrusts and related trust earnings and costs. AnyAll accounting changes are not expected to result in a material change in net 6 cash flows nor the amount of revenues we ultimately expect to realize. However, itthey may have a material impact on our consolidated financial statements and on the manner in which we record certain preneed sales activities. 6 We have not reached a final resolution of the issues but we anticipate discussions to be finalized and the financial impact calculated byduring the end of the thirdfourth quarter of 2000. Implementation, using the new accounting guidance, would include adjustments to the first three quartersquarters' financial statements as well as proforma adjustments to the prior year comparative financial statements. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 133, for which the effective date was deferred to years beginning after June 15, 2000 by SFAS No. 137, and which was amended by SFAS No. 138, to establish accounting and financial reporting standards for certain derivative instruments and certain hedging activities. The key provisions of SFAS 133, as amended, are that every derivative will be recognized as an asset or liability at its fair value and that later changes in fair value are generally reported in earnings or other comprehensive income. The Company is currently engaged in interest rate swaps which have a notional amount of $50 million to hedge against rising interest rates on its variable rate long-term debt. The swaps, which have a fair value of $1.4 million and $2.2 million at September 30, 2000 and December 31, 1999, respectively, are currently carried off-balance sheet, but will be recorded as an asset when the Company implements SFAS 133 in its first quarter of 2001. The Financial Accounting Standards Board has issued an exposure draft which would change certain aspects in the manner in which businesses account for business combinations. We expect these changes to be prospective in the nature of adoption. The most significant of the proposed changes to Carriage would be a reduction in the period of amortization of Names and Reputations, for which Carriage has been amortizing over 40 years. 2. ACQUISITIONS Acquisition activities have virtually ceased within the publicly traded companies in the deathcare industry, including the Company. During the sixnine months ended JuneSeptember 30, 2000, the Company's new business acquisition activities were limited to a long-term agreement to manage a municipal cemetery. Acquisition adjustments, primarily related to contingent consideration, were made during the first sixnine months of 2000 related tofor certain acquisitions completed in prior years. ThirteenFifteen funeral homes and elevenfourteen cemeteries were acquired during the sixnine months ended JuneSeptember 30, 1999. These acquisitions have been accounted for by the purchase method, and their results of operations are included in the accompanying consolidated financial statements from the dates of acquisition. 7 The effect of the above acquisitions on the Consolidated Balance Sheets was as follows: JUNESEPTEMBER 30, ---------------------- 1999 2000 -------- -------- (IN THOUSANDS) Current assets, net of cash acquired ............... $ 6,6459,682 $ (426)(1,712) Cemetery property .................................. 3,7404,215 -- Property, plant and equipment ...................... 11,455 1512,386 14 Deferred charges and other noncurrent assets ....... 757907 249 Names and reputations .............................. 13,246 1,33717,325 3,474 Current liabilities ................................ (1,438) 10(2,200) (140) Other liabilities .................................. (849) 148(2,850) (369) -------- -------- Total acquisitions ............................ 33,556 1,33339,465 1,516 Consideration: Debt ............................................... 1,6481,914 -- Common stock issued ................................ -- -- -------- -------- Cash used for acquisitions .................... $ 31,90837,551 $ 1,3331,516 ======== ======== The following table represents, on an unaudited pro forma basis, the combined operations of the Company and the above noted acquisitions, as if such acquisitions had occurred as of January 1, 1999. Appropriate adjustments have been made to reflect the accounting basis used in recording these acquisitions, however, these unaudited pro forma results are based on the acquired businesses' historical financial results and do not assume any additional profitability resulting from the application of the Company's revenue enhancement measures or cost reduction programs to the historical results of the acquired businesses. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have resulted had the combinations 7 been in effect on the dates indicated, that have resulted since the dates of acquisition or that may result in the future. SIXNINE MONTHS ENDED JUNESEPTEMBER 30, ------------------------------------------------------ 1999 2000 -------------- ------------------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues, net ....................................................................... $ 92,447135,707 $ 89,689129,712 Net income before income taxes .............. 13,699 5,741and extraordinary item 15,589 (9,522) Net income available to common stockholders . 7,552 2,951.......... 8,608 (8,174) Earnings per common share: Basic .................................. 0.48 0.18........................................... 0.54 (0.51) Diluted ................................ 0.44 0.18......................................... 0.55 (0.51) 8 3. MAJOR SEGMENTS OF BUSINESS Carriage conducts funeral and cemetery operations only in the United States. The following table presents external revenue, profit and loss and total assets by segment (inStates (table in thousands):.
(IN THOUSANDS) FUNERAL CEMETERY CORPORATE CONSOLIDATED - -------------- -------- -------- --------------------- ------------ ------------ ------------ External revenues: SixNine months ended JuneSeptember 30, 2000 ....................... $ 65,26893,516 $ 24,23736,012 -- $ 89,505 Six129,528 Nine months ended JuneSeptember 30, 1999 64,328 20,013....................... 91,707 33,104 -- 84,341124,811 Profit and Loss: SixLoss before extraordinary item: Nine months ended JuneSeptember 30, 2000 ....................... $ 8,6243,392 $ 4,8403,723 $ (10,392)(15,094) $ 3,072 Six(7,979) Nine months ended JuneSeptember 30, 1999 19,812 6,092 (18,630) 7,274....................... 15,189 5,345 (11,323) 9,211 Total Assets: JuneSeptember 30, 2000 ................ $399,479 $132,494......................................... $ 13,498384,510 $ 545,471 June130,317 $ 16,139 $ 530,966 September 30, 1999 ................ 378,344 121,851 13,500 513,695......................................... 384,940 128,057 14,228 527,225
4. ASSETS HELD FOR SALE During the third quarter of 2000, management identified certain underperforming funeral home and cemetery businesses for possible sale. Two funeral home businesses with a carrying value of $3.5 million were sold for cash during the third quarter resulting in a loss of $1.3 million. Additionally, eight funeral home businesses and three cemetery businesses with a carrying value of approximately $16.6 million were segregated and classified as assets held for sale, net of impairment charges of $11.1 million and liabilities to reduce the carrying value to net realizable value. The impairment charges were based on management's best estimate of net proceeds, and the ultimate proceeds received may differ. 5. LONG-TERM DEBT During September 2000, the Company restructured its existing credit facility, decreasing the line of credit from $260 million to $100 million, changing certain financial covenants and ratio calculations, and narrowing the pricing grid which determines the applicable borrowing margin for LIBOR and prime rate borrowings. The credit facility is unsecured and has a remaining term of approximately four years. In November 2000, the Company amended the Note Purchase Agreement under which it previously issued $110 million of senior notes. The amendments changed certain financial covenants and ratio calculations, and included terms requiring proceeds from asset dispositions to be applied pro rata with other senior debt to reduce outstanding principal on the senior notes. 9 The most significant changes to the debt covenants relate to the following: o Flexibility in the minimum net worth requirement to allow for restructuring charges to reduce the minimum net worth requirement; o The addition of a ratio of debt to earnings before interest, taxes, depreciation and amortization, which becomes more restrictive over time; and o The addition of a provision limiting acquisitions above a certain size without prior approval. 6. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF CARRIAGE SERVICES CAPITAL TRUST Carriage Services Capital Trust, a wholly-owned subsidiary of the Company, has issued and has outstanding 1,875,000 units of 7% convertible preferred securities. These convertible preferred securities have a liquidation amount of $50 per unit and mature in 2029. The sole assets of the Trust are 7% Convertible Junior Subordinated Debentures of Carriage Services, Inc. 810 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Carriage is a leading provider of death care services and products in the United States. Historically, our focus has been on operational enhancements at facilities currently owned to increase revenues and gross profit, as well as growth through acquisitions. That focus resulted in a track record of growth from acquisition opportunities; high standards of service, operational and financial performance; and an infrastructure containing measurement and management systems. This focus included institutionalizing internal training, internal growth, and making quality initiatives an integral part of the culture. InAs previously announced for 2000, the operating focus has beenwas revised to emphasize increasing operating cash flow and growth through strategies that do not require investment of new capital. During the third quarter of 2000, we initiated a major restructuring program termed "Fresh Start" in response to the current industry environment and deterioration of the Company's operating results this year. The program began with a review of the funeral home and cemetery portfolios, operating strategies, organizational structure, and financial covenants under the Company debt agreements. The principal elements of Fresh Start include downsizing the corporate organization, changing the operating leadership, changing the preneed funeral marketing strategy, stratifying by performance the funeral home and cemetery portfolios, implementing action plans to improve underperforming businesses, disposing of some underperforming businesses, reviewing the carrying basis of other underperforming businesses, and modifying financial covenants with lenders to facilitate the execution of Fresh Start. Many of the elements of Fresh Start are well underway. During the month of September, there was a considerable downsizing of the Houston corporate support staff, and the corporate headquarters were moved to more modest facilities. The preneed funeral strategy was changed from a national, centralized strategy to a local decentralized strategy, whereby each business will have a program customized to its local needs which will be managed by the local funeral home manager. As a result, the national preneed funeral sales organization was eliminated and funeral preneed trust investments are in the process of being consolidated with one trustee. Changes in personnel were also made at the senior management level in the funeral home and cemetery operating segments. As a result of the initial review of the funeral home and cemetery portfolios, the businesses were divided into two groups: core and underperforming. At the conclusion of the initial review, we made the decision to sell ten funeral home businesses and three cemetery businesses. The Company recorded impairment charges and related losses for the sale of two of the businesses totaling $12.4 million. Our continued assessment of the underperforming properties may result in additional impairment losses in the fourth quarter, which may be material. Working directly with the Company's banks and senior note holders, we were able to modify the financial covenants on the debt to allow for all elements of Fresh Start to be executed and any adjustments resulting from the adoption of SAB 101 to be made. 11 RESULTS OF OPERATIONS Income from operations, which the Company defines as earnings before interest and income taxes, decreased, as a percentage of net revenues, from 22.2%19.4% for the secondthird quarter of 1999 to 13.8%(25.1)% for the secondthird quarter of 2000. This decrease was due largely to lower service volumes atasset impairment charges and losses on sale totaling approximately $12.4 million and other nonrecurring charges totaling approximately $1.8 million. Excluding the individual funeral locations combined with increased operating costs.impairment charges and other nonrecurring charges, income from operations for the third quarter 2000 was 10.5% of net revenue. Gross margins for the funeral homes decreased from 27.9%24.4% in the secondthird quarter of 1999 to 18.0%16.2% in the secondthird quarter of 2000, largely due to a decrease in revenue of 3.7%while revenues increased 2%. As a percentage of cemetery net revenues, cemetery gross profit was 23.9%17.7% in the secondthird quarter of 2000 compared to 26.6%25.9% in the secondthird quarter in 1999. Revenues and gross profits from cemeteries decreased 1.8%9% and 12.0%38%, respectively, in the secondthird quarter of 2000 compared to the same period in 1999. RESULTS OF OPERATIONS The following is a discussion of the Company's results of operations for the three and sixnine month periods ended JuneSeptember 30, 1999 and 2000. For purposes of this discussion, funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as "existing operations." Operations acquired or opened during either period being compared are referred to as "acquired operations." FUNERAL HOME SEGMENT. The following table sets forth certain information regarding the net revenues and gross profit of the Company from its funeral home operations for the three and sixnine months ended JuneSeptember 30, 1999 compared to the three and sixnine months ended JuneSeptember 30, 2000. 9 THREE MONTHS ENDED JUNESEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED JUNESEPTEMBER 30, 2000. THREE MONTHS ENDED SEPTEMBER 30, CHANGE ------------------ ------------------ 1999 2000 AMOUNT PERCENT ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations ........ $28,834 $28,753 $ (81) (0.3%) Acquired operations ........ 249 912 663 * ------- ------- ------ Total net revenues $29,083 $29,665 582 2.0% ======= ======= ====== Gross profit: Existing operations ........ $ 7,070 $ 4,633 $(2,437) (34.5%) Acquired operations ........ 22 161 139 * ------- ------- ------ Total gross profit $ 7,092 $ 4,794 $(2,298) (32.4%) ======= ======= ====== - -------------------- * Not meaningful. 12 NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000.
THREENINE MONTHS ENDED JUNESEPTEMBER 30, CHANGE ------------------- --------------------------------------------- -------------------------- 1999 2000 AMOUNT PERCENT -------- -------- -------- ------------------ ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations ...................................................... $ 30,01586,438 $ 27,69082,489 $ (2,325) (7.7%(3,949) (4.6%) Acquired operations ............... 801 1,996 1,195....................................... 6,973 12,443 5,470 * -------- -------- ------------------ ---------- ---------- Total net revenues .................................... $ 30,81693,411 $ 29,68694,932 $ (1,130) (3.7%) ======== ======== ========1,521 1.6% ========== ========== ========== Gross profit: Existing operations ...................................................... $ 8,53325,087 $ 4,99616,853 $ (3,537) (41.5%(8,234) (32.8%) Acquired operations ............... 71 342 271....................................... 2,163 2,687 524 * -------- -------- ------------------ ---------- ---------- Total gross profit .................................... $ 8,60427,250 $ 5,33819,540 $ (3,266) (37.9%(7,710) (28.3%) ======== ======== ========
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000.
SIX MONTHS ENDED JUNE 30, CHANGE ------------------- -------------------- 1999 2000 AMOUNT PERCENT -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations ............... $ 60,647 $ 56,688 $ (3,959) (6.5%) Acquired operations ............... 3,681 8,580 4,899 * -------- -------- -------- Total net revenues ...... $ 64,328 $ 65,268 $ 940 1.5% ======== ======== ======== Gross profit: Existing operations ............... $ 18,916 $ 12,639 $ (6,277) (33.2%) Acquired operations ............... 1,242 2,106 864 * -------- -------- -------- Total gross profit ...... $ 20,158 $ 14,745 $ (5,413) (26.9%) ======== ======== ================== ========== ==========
- --------- * Not meaningful. Total funeral net revenues for the three months ended JuneSeptember 30, 2000 decreased $1.1 millionincreased $582,000 or 3.7% from2.0% over the three months ended JuneSeptember 30, 1999. The lowerhigher net revenues reflect an increase of $1.2$663,000 in net revenues from acquired operations and a decrease of $81,000 in net revenues from existing operations. Total funeral net revenues for the nine months ended September 30, 2000 increased $1.5 million or 1.6% over the nine months ended September 30, 1999. The higher net revenues reflect an increase of $5.5 million in net revenues from acquired operations and a decrease in net revenues of $2.3 million from existing operations. Total funeral net revenues for the six months ended June 30, 2000 increased $0.9 million or 1.5% over the six months ended June 30, 1999. The higher net revenues reflect an increase of $4.9 million in net revenues from acquired operations and an decrease in net revenues of $4.0$3.9 million from existing operations. The number of funeral service calls decreased 7.7% and 6.3% for existing operations was relatively unchanged in comparing the second quarter and sixthree months forended September 30, 2000 to the samethree months ended September 30, 1999, and was 4.3% lower in comparing the nine month periods in 1999, respectively.ended September 30, 2000 to 1999. The average revenue per service call was unchangeddeclined 0.3% for each of the three and nine month periods in comparing the second quarter 2000 to the second quarter for 1999, and decreased 0.3% in comparing the first half of 2000 and the first half of 1999. Total funeral gross profit for the three months ended JuneSeptember 30, 2000 decreased $3.3$2.3 million or 37.9%32.4% over the comparable three months of 1999. The decrease was largely impacted by higher salary and casket costs in 2000 and adjustments to previously recorded field incentive compensation in the 1999 quarter. The lower total gross profit reflected an increase of $0.3 10 million$139,000 from acquired operations and a decrease of $3.5 millionin gross profit from existing operations.operations of $2.4 million. Total funeral gross profit for the sixnine months ended JuneSeptember 30, 2000 decreased $5.4$7.7 million or 26.9% from28.3% over the comparable sixnine months of 1999. The lowerhigher total gross profit reflected an increase of $0.9 million$524,000 from acquired operations and an decrease of $6.3$8.2 million from existing operations. Gross profit for existing operations decreased for both periods due primarily to the impact of the decrease in same-store revenues. Total gross margin decreased from 27.9%24.4% for the secondthird quarter of 1999 to 18.0%16.2% for the secondthird quarter of 2000 and decreased from 31.3%29.2% for the first sixnine months of 1999 to 22.6%20.6% for the first sixnine months of 2000. CEMETERY SEGMENT. The following table sets forth certain information regarding the net revenues and gross profit of the Company from its cemetery operations for the three and sixnine months ended JuneSeptember 30, 1999 compared to the three and sixnine months ended JuneSeptember 30, 2000. 13 THREE MONTHS ENDED JUNESEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED JUNESEPTEMBER 30, 2000.
THREE MONTHS ENDED JUNESEPTEMBER 30, CHANGE ------------------- --------------------------------------------- -------------------------- 1999 2000 AMOUNT PERCENT -------- -------- -------- ------------------ ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations ...................................................... $ 11,64211,340 $ 10,2989,382 $ (1,344) (11.5%(1,958) (17.3%) Acquired operations ............... 13 1,148 1,135....................................... 47 977 930 * -------- -------- ------------------ ---------- ---------- Total net revenues .................................... $ 11,65511,387 $ 11,44610,359 $ (209) (1.8%(1,028) (9.0%) ======== ======== ================== ========== ========== Gross profit: Existing operations ...................................................... $ 3,1062,914 $ 2,6041,797 $ (502) (16.2%(1,117) (38.3%) Acquired operations ............... -- 128 128....................................... 33 35 2 * -------- -------- ------------------ ---------- ---------- Total gross profit .................................... $ 3,1062,947 $ 2,732 $ (374) (12.0%1,832 ($ 1,115) (37.8%) ======== ======== ================== ========== ==========
- -------------------- * Not meaningful. SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 1999 COMPARED TO SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2000.
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, CHANGE ------------------- --------------------------------------------- -------------------------- 1999 2000 AMOUNT PERCENT -------- -------- -------- ------------------ ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations ...................................................... $ 17,18425,844 $ 16,34323,265 $ (841) (4.9%(2,579) (10.0%) Acquired operations ............... 2,829 7,894 5,065....................................... 5,556 11,331 5,775 * -------- -------- ------------------ ---------- ---------- Total net revenues .................................... $ 20,01331,400 $ 24,23734,596 $ 4,224 21.1% ======== ======== ========3,196 10.2% ========== ========== ========== Gross profit: Existing operations ...................................................... $ 4,4056,591 $ 4,3735,743 $ (32) (0.7)%(848) (12.9%) Acquired operations ............... 730 2,083 1,353....................................... 1,490 2,545 1,055 * -------- -------- ------------------ ---------- ---------- Total gross profit .................................... $ 5,1358,081 $ 6,4568,288 $ 1,321 25.7% ======== ======== ========207 2.6% ========== ========== ==========
- -------------------- * Not meaningful. 11 Total cemetery net revenues for the three months ended JuneSeptember 30, 2000 decreased $0.2$1.0 million fromover the three months ended JuneSeptember 30, 1999 and total cemetery gross profit decreased $0.4$1.1 million fromover the comparable three months of 1999. The lower net revenues reflect an increase of $1.1$0.9 million in net revenues from acquired operations and a decrease of $1.3$2.0 million in revenues from existing operations. Total cemetery net revenues for the sixnine months ended JuneSeptember 30, 2000 increased $4.2$3.2 million over the sixnine months ended JuneSeptember 30, 1999, and total cemetery gross profit increased $1.3 million$207,000 over the comparable sixnine months of 1999. Total gross margin decreased from 26.6%25.8% for the three months ended JuneSeptember 30, 1999 to 23.9%17.7% for the three months ended JuneSeptember 30, 2000. Total gross margin increaseddecreased from 25.7% for the sixnine months ended JuneSeptember 30, 1999 to 26.6%24.0% for the sixnine months ended JuneSeptember 30, 2000. The lower gross margins in 2000 are due to lower amounts from preneed sales in the current year, which generally carry a higher gross margin. 14 OTHER. General and administrative expenses for the six monthsthree and nine month periods ended JuneSeptember 30, 2000 increased $157,000 or 3.3%$2.0 million and $2.2 million over the first six monthsrespective three and nine month periods of 1999. As a percentage of net revenues these expenses decreased from 5.6%The increase for the six months ended June 30, 1999periods consists primarily of severance charges related to 5.4%the termination of certain officers and employees in the third quarter of 2000 (including $1.1 million related to a former executive officer), and other nonrecurring expenses related to the move of the Company's home office, the Company's e-commerce initiative and costs related to preparing for the six months ended June 30, 2000, as the expenses were spread over a larger volumeadoption of revenue.SAB 101. Interest expense and other financing costs for the sixnine months ended JuneSeptember 30, 2000 increased $3.0$3.4 million over the first sixnine months of 1999 due to borrowings to fund acquisitions during 1999, and the restructuring of the Company's debt during mid-1999 to reflect longer maturities, carrying higher rates. Preferred stock dividends of $40,000$61,000 were subtracted from the $3.1$8.0 million of net incomeloss in computing the net income availableloss attributable to common stockholders of $3.0 million for the six months ended June 30, 2000.stockholders. The reduction in preferred stock dividends from 1999 to 2000 was due to conversions of the preferred stock to common stock. For the sixnine months ended JuneSeptember 30, 2000, the Company provided for income taxestax benefits on income before income taxesthe pre-tax loss at a combined state and federal rate of 47.9%14.8% compared with a provision for income taxes on pre-tax income of 43% for the same period in 1999. The effective rate recorded in the current year is lower due to the impact of nondeductible costs, primarily nondeductible goodwill amortization, which reduce the pre-tax loss in 2000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $5.7$6.4 million at JuneSeptember 30, 2000, representing an increase of $3.1$3.9 million from December 31, 1999. For the sixnine months ended JuneSeptember 30, 2000, cash provided by operations was $15.2$18.5 million as compared to cash provided by operations of $10.2$16.6 million for the sixnine months ended JuneSeptember 30, 1999. The improvementincrease in net cash provided by operating activities was provided in part by improvements in receivable collections, changeslargely due to a decrease in the Company's tax strategiesgrowth of receivables, inventory and improvements in processes to shorten the time in which distributions from preneed trusts are received.funeral costs. Cash used in investing activities was $10.3$12.2 million for the sixnine months ended JuneSeptember 30, 2000 compared to $44.6$56.7 million for the first sixnine months of 1999, due primarily to the cessation of acquisitions whileduring the Company concentrates on maximizing free cash flow.current year. In the first sixnine months of 2000, cash flow used inby financing activities amounted to approximately $1.7$2.4 million, primarily due to payments to prior owners on the Company's credit facility and acquisition related obligations to prior owners.obligations. Historically, we have financed our acquisitions with proceeds from debt and the issuance of common and preferred stock. As of JuneSeptember 30, 2000, the Company had 1,182,500 shares outstanding of Series D Preferred Stock. The Series D Preferred Stock is convertible into Class B Common Stock. The holders of Series D Preferred Stock are entitled to receive cash dividends at an annual rate of $.06-$.07 per share depending upon the date such shares were issued. The Company may, at its option, redeem all or any 12 portion of the shares of the Series D Preferred Stock at a redemption price of $1.00 per share, together with all accrued and unpaid dividends. Such redemption is subject to the right of each holder of Series D Preferred Stock to convert such holder's shares into shares of Class B Common Stock. On December 31, 2001, the Company must redeem all shares of Series D Preferred Stock then outstanding at a redemption price of $1.00 per share, together with all accrued and unpaid dividends. Carriage hasPrior to September 15, 2000, the Company had a credit facility with a group of banks for a $260 million revolving line of credit. The credit facility has a five-year term extending through June 2004, is unsecured and contains customary restrictive covenants, including a restriction on the payment of dividends on common stock, and requires thatDuring September 2000, we maintain certain financial ratios. Interest underreduced the credit facility is provided at bothto $100 million and amended certain restrictive covenants and financial ratio calculations, and narrowed the pricing grid 15 which determines the applicable borrowing margin for LIBOR and prime rate options.borrowings. The Companycredit facility is unsecured and has a remaining term of approximately four years. We have the ability under the credit facility to increase its total debt outstanding to as much as 60 percent of its total capitalization. As of JuneSeptember 30, 2000, $50$53.0 million was outstanding under the credit facility and the Company'sour debt to total capitalization was 3839 percent. During November 2000, we also amended the Note Purchase Agreement under which we had previously issued $110 million of senior private notes. The amendments changed certain financial covenants and ratio calculations, and include terms requiring proceeds from asset dispositions to be applied pro rata with other senior debt to reduce outstanding principal on the senior private notes. The most significant changes to the debt covenants relate to the following: o Flexibility in the minimum net worth requirement to allow for restructuring charges to reduce the minimum net worth requirement; o The addition of a ratio of debt to earnings before interest, taxes, depreciation and amortization, which becomes more restrictive over time; and o The addition of a provision limiting acquisitions above a certain size without prior approval. We believe that cash flow from operations and borrowings under the credit facility should be sufficient to fund anticipated capital expenditures as well as other operating requirements. Acquisition spending during the remainder of 2000, if any, is anticipated to be significantly less than the amounts during either of the two preceding years. Because future cash flows and the availability of financing are subject to a number of variables, there can be no assurance that the Company's capital resources will be sufficient to fund its capital needs. Additional debt and equity financings may be required in the future. The availability and terms of these capital sources will depend on prevailing market conditions and interest rates and the then-existing financial condition of the Company. ACCOUNTING CHANGES In December 1999, the Securities and Exchange Commission (the "Commission") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which, as amended, is to be implemented by the beginning offor the fourth quarter of 2000, and applied retroactively to the first three quarters of this fiscal year, to provide guidance related to recognizing revenue in circumstances in which no specific authoritative literature exists. Members of the death care industry, including us,in consultation with the Commission, have agreed to certain changes in the manner in which cemetery preneed sales and costs are reviewingrecorded. The changes that are meaningful to the Company are a change from recording cemetery merchandise and service revenue, and their related costs at the time the contract is executed, to the period in which they are delivered. The industry participants are continuing to review the application of the Staff Accounting Bulletin with the Commission which may have a material affect onas it relates to the manner in which we record preneed revenuestrusts and related trust earnings and costs. AnyAll accounting changes are not expected to result in a material change in net cash flows nor the amount of revenues we ultimately expect to realize. However, itthey may have a material impact on our consolidated financial statements and on the manner in which we record certain preneed sales activities. We have not reached a final resolution of the issues but we anticipate discussions to be finalized and the financial impact calculated byduring the end of the thirdfourth quarter of 2000. Implementation, using the new accounting guidance, would include adjustments to the first three quartersquarters' financial statements as well as proforma adjustments to the prior year comparative financial statements. 16 The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 133, for which the effective date was deferred to years beginning after June 15, 2000 by SFAS No. 137, and which was amended by SFAS No. 138, to establish accounting and financial reporting standards for certain derivative instruments and certain hedging activities. The key provisions of SFAS 133, as amended, are that every derivative will be recognized as an asset or liability at its fair value and that later changes in fair value are generally reported in earnings or other comprehensive income. The Company is currently engaged in interest rate swaps which have a notional amount of $50 million to hedge against rising interest rates on its variable rate long-term debt. The swaps, which have a fair value of $1.4 million and $2.2 million at September 30, 2000 and December 31, 1999, respectively, are currently carried off-balance sheet, but will be recorded as an asset when the Company implements SFAS 133 in its first quarter of 2001. The Financial Accounting Standards Board has issued an exposure draft which would change certain aspects in the manner in which businesses account for business combinations. We expect these changes to be prospective in the nature of adoption. The most significant of the proposed changes to Carriage would be a reduction in the period of amortization of Names and Reputations, for which Carriage has been amortizing over 40 years. 13 SEASONALITY The Company's business can be affected by seasonal fluctuations in the death rate. Generally, death rates are higher during the winter months. INFLATION Inflation has not had a significant impact on the results of operations of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK There has been no material change in the Company's position regarding quantitative and qualitative disclosures of market risk from that disclosed in the Company's 1999 Form 10-K. 1417 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 2000 annual meeting of shareholders was held on May 17, 2000. All director nominees were elected. The voting tabulation was as follows: NAME OF NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD --------------- ------------------- ------------------------ Melvin C. Payne.............. 22,784,607 422,687 C. Byron Snyder.............. 22,784,607 422,687 The terms of the following other directors continue after the meeting: Mark W. Duffey, Greg M. Brudnicki, Vincent D. Foster, Stuart W. Stedman, Ronald A. Erickson, and Mark F. Wilson. Other matters voted upon at the meeting were as follows: NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING ---------- ------------- ---------------- Amendments to 1996 Directors' Stock Option Plan ........... 20,688,636 2,468,561 50,097 Selection of Arthur Andersen LLP as auditors for 2000 ........ 23,178,785 13,439 15,070 ITEM 5. OTHER INFORMATION FORWARD-LOOKING STATEMENTS Certain statements made herein or elsewhere by, or on behalf of, the Company that are not historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on assumptions that the Company believes are reasonable; however, many important factors could cause the Company's actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. CAUTIONARY STATEMENTS The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual consolidated results and could cause the Company's actual consolidated results in the future to differ materially from the goals and expectations expressed herein and in any other forward-looking statements made by or on behalf of the Company. (1) Achieving growth in free cash flow from operations depends primarily on achieving anticipated levels of earnings before depreciation, amortization and amortization,other non-cash charges, controlling capital expenditures to budgeted levels, collecting accounts receivable and reducing preneed funeral costs. 15 (2) Achieving the Company's revenue goals also is affected by the volume and prices of the properties, products and services sold, as well as the mix of products and services sold. The annual sales targets set by the Company are aggressive, and the inability of the Company to achieve planned volume or prices could cause the Company not to meet anticipated levels of revenue. In certain markets the Company expects to increase prices, while in other markets prices will be lowered. The ability of the Company to achieve volume or price targets at any location depends on numerous factors, including the local economy, the local death rate, competition and changes in consumer preferences, including cremations. (3) Future revenueRevenue also is affected by the level of prearranged sales in both current and prior periods. The level of prearranged sales may be adversely affected by numerous factors, including deterioration in the economy, which causes individuals to have less discretionary income, as well as changes in commission practices and contractual terms. Future revenue will also be affected by the Company's recent decision to eliminate its national preneed sales and marketing organization and to manage future preneed activities at the local business level. (4) In addition to the factors discussed above, financial performance may be affected by other important factors, including the following: (a) The ability of the Company to manage its growth in terms of implementing internal controls and information gathering systems, and retainingretain or attractingattract key personnel, among other things.personnel. (b) The amount and rate of growth in the Company's general and administrative expenses. (c) Changes in interest rates, which can increase or decrease the amount the Company pays on borrowings with variable rates of interest. (d) The Company's debt covenants, such as the debt-to-capital ratio, the number of shares of common stock outstandingdebt-to-EBITDA ratio, and the portion of the Company's debt that has fixed or variable interest rates.charge coverage ratio. 18 (e) Availability and related terms of debt and equity financing to fund operating needs. (f) The impact on the Company's financial statements of accounting charges that may result from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures.structures as part of the Fresh Start restructuring program. (g) The amount of net proceeds actually realized on assets held for sale. (h) Changes in government regulation, including tax rates and their effects on corporate structure. (h)(i) Changes in inflation and other general economic conditions domestically, affecting financial markets (e.g. marketable security values). (i)(j) Unanticipated legal proceedings and unanticipated outcomes of legal proceedings. (j)(k) Changes in accounting policies and practices required by generally accepted accounting principles or the Securities and Exchange Commission, such as amortization periods for long-lived intangible assets and revenue or cost recognition in the preneed cemetery or funeral business. The Company also cautions readers that it assumes no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by, or on behalf of, the Company. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits *10.1-- Promissory Note executed*10.1 -- Amendment No. 3 to Credit Agreement by Russell W. Allen toand among the Company dated March 31, 2000. *10.2-- Security Agreement between Russell W. Allenand Bank of America, N.A. and the Company,lenders identified therein, dated March 31,as of September 15, 2000. *10.3-- Amended*10.2 -- Amendment No. 1 to Note Purchase Agreement, by and Restated Security Agreement - Pledge, between Russell W. Allenthe Company and the Company,senior note holders identified therein, dated March 31,as of November 6, 2000. *11.1--*11.1 -- Statement regarding computation of per share earnings. *12 -- Calculation of Ratio of Earnings to Fixed Charges *27.1--*27.1 -- Financial Data Schedule. - --------- (*) Filed herewith. (b) Reports on Form 8-K None. 1719 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARRIAGE SERVICES, INC. August 8,November 14, 2000 /s/ Thomas C. Livengood - ------------------ -------------------------------- Date Thomas C. Livengood, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 1820